Risk Management Case

Alice just graduated from IUP with a finance degree. Her friend Scott graduated with a degree in psychology, and Amanda graduated with a degree in computer technology. The three friends decide to begin an online business called CyberChildcare Services. The service matches parents with childcare workers who watch their children anywhere from a few hours on date night all the way to live-in, 24-hour, nanny service. Alice manages to obtain a $1,400,000 equity investment (25% ownership in the company) from a local investor to fund the start-up costs. Amanda creates a website and selects a service provider. CyberChildcare purchases the computer equipment it needs and rents a small office to use for administrative purposes. Alice prepares a marketing plan that includes mass emails to employees of large participating corporations and governmental organizations that are trying to help employees find childcare so they can return to work after the pandemic. Thus far Amanda has gotten 50 large corporations and twelve state governments to participate. Amanda is able to increase the circulation by including a hidden subroutine in the email that automatically sends the email on to all the members of a recipient's address book, and to their Twitter and Facebook accounts. The email advertisement states that CyberChildcare can find a qualified, well-trained childcare worker for any situation. It boasts that all workers not only have experience, but hold current law enforcement clearances to work with minors, and have certifications to perform basic first aid and CPR on children. While other services also check for clearances and certifications, CyberChildcare is unique in providing psychological screening of its workers. Scott is currently working on his doctorate in psychology online in order to get an official state license. After getting the business up and running, $200,000 is left over from the initial $1,400,000 investment, so Alice opens up an online brokerage account for the company.

Each childcare worker who wants to be placed by CyberChildcare is required to fill out an information sheet containing personal contact information, to complete several psychological questionnaires to be reviewed by Scott, and to upload copies of clearances and certifications, along with a current work history. They must state what types of jobs they are seeking, short-term, long-term, temporary, permanent, visiting, live-in, and what geographical area they can cover. Scott reviews the information provided and eliminates applicants he believes are psychologically unfit. Once approved, each worker is provided space on the server to put personal information, including pictures, video, and audio, for prospective parents to view as they try to select the best worker for their situation. The workers can change or add to their information from anywhere in the world that web access is available. Parents and workers may also visit each other in chat rooms provided by CyberChildcare to conduct private interviews. If workers and parents have cameras and microphones, they can videoconference as well utilizing CyberChildcares equipment. The chat rooms and videoconferences can be customized to the customers specifications and are a true virtual reality experience. CyberChildcare believes this technology gives them an advantage over other childcare matching services. CyberChildcare records all chatroom conferences for later review if necessary.

Because of their technological advantages, CyberChildcare is able to charge workers $250 per month, payable in advance, to advertise on their website. Payment may be by credit card, money order, or personal check. Alice is amazed when, during the first two weeks, 750 potential workers sign up for the service. Scott is swamped with so many applications he cannot possibly evaluate all of them. CyberChildcare places all workers into the system and hopes Scott will be able to review the psychological tests sometime in the future when applications slow down. Amanda is working 13 hours per day maintaining the equipment and she is worried CyberChildcare may experience shutdowns if more people join unless the company acquires more capacity. Parents visiting the website must enter personal information and credit card information so that CyberChildcare can match them with appropriate workers, and to prove they have the ability to pay. In the first two weeks, 1,200 parents created accounts and entered the required information. CyberChildcare collects a fee equal to 20% of the total paid for childcare services. 100 childcare jobs have been scheduled thus far, and the number of connections is increasing rapidly.

Alice is having fun managing the funds that have been collected. She hopes to make big investment returns for the company by trading Bitcoin and other volatile investments. As she follows the financial markets most of the day, she does not have time to check the status of clearances and certifications uploaded by potential childcare workers. Despite short meetings each morning at 10 am, Alice, Scott, and Amanda focus almost exclusively on their own tasks.

(a) Identify the five most critical possible exposures to loss and list them in order of importance. Make sure to explain what your concern is for each exposure and what the negative impact might be.

(b) For the two most critical exposures, give two possible risk management techniques that would be appropriate and explain why. Identify each technique as either risk control or risk financing. For risk control techniques, include whether the techniques will reduce frequency, severity, or both.